Fixed-term annuities: compare the income with the money left at maturity

A fixed-term annuity can provide agreed pension income for a set period and a specified maturity amount at the end, depending on the product. It does not automatically provide income for the rest of your life.

Read the regular payments and maturity value together. A large annual payment can look attractive while leaving less money for the next stage of retirement, and the options available when the term ends may differ from those available today.

Establish what is guaranteed and for how long

LV='s fixed-term annuity explanation describes a set income period, a maturity value and optional features. It also highlights the risk that future annuity rates could be lower when the plan ends.

Obtain the exact term, payment frequency, maturity amount and conditions from the quotation. Check whether income is level or increases and how any death benefits work. A product name alone does not establish those details.

Keep a fixed-term annuity separate from a lifetime annuity in a comparison table. One provides a defined period of income; the other is designed to continue for life under its terms. Comparing only their first-year payments misses that fundamental difference.

Follow the cash through an illustrative contract

Suppose an invented arrangement uses £100,000 of pension money to provide £5,000 a year for five years and a £90,000 maturity amount. Assume all five annual payments are made and ignore tax and any other costs for the illustration.

The income payments total £25,000. Adding the £90,000 maturity amount gives £115,000 of nominal receipts over the contract. These arrive at different times, so this is not an annualised investment-return calculation.

Calling the £5,000 payment a 5% investment return would be misleading. The maturity amount is £10,000 below the initial £100,000, so the income and remaining capital must be assessed together. Use the provider's full illustration rather than turning the payment rate into a savings-rate comparison.

Identify the role in the retirement timeline

A fixed term may be considered for a particular stage, such as a period before another income begins. Write down why that term has been chosen and what happens afterwards.

If the household needs £500 a month from the arrangement, that is £6,000 a year. The example's £5,000 annual payment would leave a £1,000 gap before considering tax. The fact that payments are guaranteed does not mean their amount matches the spending need.

Also consider inflation. A level payment has a fixed cash amount, while household costs may change. If the quote includes increases, assess the starting income, increase basis and maturity value as one package.

Plan for the end before the beginning

At maturity, the next decision may involve another annuity, drawdown or another permitted pension option. Future product terms, health, tax rules and personal circumstances can differ from today's.

Do not assume the maturity amount will buy the same income at the end of the term. Ask for scenarios that use different future income rates, and check what other secure income or assets the household would have by then.

If the plan depends on a higher State Pension or a partner's retirement benefits starting, verify those dates and amounts independently. A maturity date matching a hoped-for event does not make that event certain.

Check death benefits and early access

Ask what happens if death occurs during the term: whether income continues, a lump sum is payable, who can receive it and how the chosen protection affects the initial quote. Do not assume all remaining scheduled payments automatically pass to the estate.

Early encashment or transfer, where available, can produce a different value from the stated maturity amount. LV='s explanation warns that cashing in early may yield substantially less than the remaining guaranteed payments.

Keep accessible reserves outside any assumption that the contract can be reversed at no cost. If health, housing or care needs change, the practical flexibility may matter as much as the initial income.

Compare tax and costs on a consistent basis

Establish whether the quotation is before Income Tax and how pension payments will be taxed in your circumstances. A gross annual income figure is not the same as spendable income.

Ask about advice, arrangement and product costs, including whether they are paid separately or reflected in the benefits quoted. Ensure competing quotations use the same purchase amount after any deductions, along with consistent income and death-benefit choices.

Do not compare a pension-funded product directly with a tax-free savings account rate without accounting for their different structures and access conditions. The cashflows and guarantees are not interchangeable.

Request a comparison covering the next stage too

Bring the retirement budget, dates of other pensions and accessible savings to the advice discussion. Ask why the proposed term and maturity amount fit those needs and what would change if future income options are less favourable.

Related guides cover annuity advice, pension drawdown advice and retirement cashflow modelling. A useful recommendation explains both the income during the term and the resources left for retirement afterwards.